All right. Another good session here with another good internet company. I'm Brad Erickson, obviously. I cover internet at RBC. Very pleased today to have the management team from EverQuote in from Boston, from Cambridge. Both of you?
Yep. Yes.
Awesome. Thanks for being here. Although someone was in Paris, it sounds like, recently as well. So yeah. Jayme Mendal, obviously. Joseph Sanborn, CFO. Thanks for being here.
Thank you. Appreciate the invitation.
Yeah. Yeah. No, that's great. I always like to start with maybe just a minute or two in the quarter. I obviously have my laundry list of questions, and then we'd certainly encourage questions. I'll open it up sort of midway through, so if anybody has anything, feel free to lob it in, so yeah.
Sure. Q3 is a great quarter. It's another record quarter across all of our financial metrics: revenue, variable marketing margins, EBITDA, cash flow, and it's really thanks to continued strong execution by the team following the kind of refocusing, realignment of the business last year and a strong auto insurance market, which has really driven a good amount of growth as it recovered this year.
Yeah. And maybe I should call it out as a couple of big drivers in that. One is we had an 8x increase relative to a year ago on enterprise carrier spend. So obviously, carriers are back, which is a big highlight of it. Our home vertical continues to do strong. We have 30% growth there, which was nice. And in addition to the EBITDA, I mean, just maybe I'll pause and contrast it with a year ago. We didn't have EBITDA. Now it's $18.8 million. And notably, we also translated into cash flow about $23 million in the quarter added. Reflecting, we've changed the model from where just EBITDA is a really good proxy for operating cash flow, give or take, working capital. And lastly, net income. We were at $11.6 million net income, which is something that people wouldn't associate with the EverQuote story of a year ago.
So we've made a lot of changes. We like profitability.
Profitability is good. Making money's back in style .
It's been very helpful.
Yeah. Yeah. So start with the market. You mentioned some of the enterprise rebound and just the car insurance market. Just what are the factors driving that? And then particularly, what moment are we at, right? Because there's a rebound. Clearly, there's a cycle going on here. What moment are we at right now, would you say? Best guess.
So what's driving it? The whole cycle has been driven by auto insurance carrier profitability or lack thereof, underwriting profitability. And for a long period of time in 2022, 2023, underwriting profitability was very challenged. Carriers were not making money on the incremental policy that they'd add to their books. And so they really didn't want new customers for that period of time. And of course, we are in the business of delivering new customers to insurance carriers. 2024, that began to change. And so the carriers have been working through this multi-year process of getting their rates sufficiently high, which requires them to go through all the state departments of insurance for rate increase approvals, such that their underwriting profitability got back to sort of target levels. And then at that point, they were interested in growth once again.
Early this year, we began to see, one, maybe a couple of carriers start to break through and get back to really healthy underwriting profitability. Then we began to see it really broaden out over the course of the year. So you have more carriers looking quite profitable, seeing mid- to low-90s combined ratios almost across the board for all the major carriers, which is kind of where they want to be, target ranges for most of them. And with that backdrop, the other interesting dynamic is there's one carrier that was out in front of the rest, and they've been able to take a lot of share over the last year or a couple of years. So you have this dynamic where everyone's reasonably healthy from an underwriting profitability standpoint. They have appetite for growth. One is growing and taking share. The rest are actually losing share.
So their policies in force are going down. And this is setting up this dynamic where they're beginning to lean more heavily back into marketing spend and other distribution investments. So this has been building over the course of the year. You see it reflected in the performance each quarter, sequential improvement. And we expect it to carry into next year. So we use baseball analogies. I think Joseph started the trend, but middle innings, depending on how you characterize it, sort of mid, mid to later innings is where we believe we are in the recovery. So the dimensions of growth that still exist in the context of the recovery specifically are a few fold. Number one is you have a handful of states that really haven't granted the level of rate increase that carriers need. And so big states, states like California are virtually off for most carriers.
And so these are states that, as a collective, probably represent 10%-20% of the population that are yet to sort of come back online. We expect they'll begin to do that next year. Then you've got sort of the longer tail of carriers who have started to reactivate their sort of spend and their footprint but haven't quite gotten there yet. So there's just more carrier spend to come as a result of that. And then you layer on the fact that premiums now have gone up 40%+ from pre-downturn. So getting back to normal is not getting back to where we were. It's getting back to where we were plus some significant amount because premium ad spend tends to be managed proportionate to premium. So we feel we're in a really good part of the cycle right now. And that's the industry cycle.
Take a step back. You've got this more secular story that has been a part of the EverQuote story since our IPO, which is dollars in insurance distribution are shifting into digital channels. Right? And so you've got this secular growth, which should account for 10%-15% per year for the foreseeable future as carriers get more proficient in advertising in these channels as they improve their digital workflows to get more performance out of these channels. And as consumers continue to go online more and more to shop for things, including insurance.
Yeah. Got it. And maybe just to follow up on the carrier behavior and what drives that, clearly, better underwriting loss ratios and all that stuff. Do you expect kind of a convergence of all the carriers? You mentioned it sounds like there's more underperformers and maybe a few or fewer outperformers right now. Do you expect that to kind of converge over time where the market becomes sort of even healthier in aggregate? Or is that not the right way to think about it?
No, I think it is. I think carriers have all evolved sort of different rates into this sort of digital age. And there are a small number of carriers that have really built the muscle of digital customer acquisition. And they tend to be the carriers that are taking share, if you look, over the last five, 10 years. Now, there are others that are catching up. Everyone's just moving at a different rate. And part of the value that we bring to our customers is just to help them in that effort, right? Help them build the capability they need to get the performance out of a channel like ours. But I do think the whole industry is in a process of evolving to a more sort of digital-centric state.
Yeah. Got it. And just what's the—you mentioned the secular aspect of digital shift makes a ton of sense. The one thing, though, we deal with, right, in performing ad channels is they can be very sensitive, right? Turned on, turned off very quickly, whereas brand spend, while maybe underperforming from a growth perspective, a little less sensitive. How do you guys sort of manage that volatility in your business? And what have you seen? Is it still just that that general arc of digital shift sort of outweighs it? Or do you still see sort of some hypersensitivity depending on performance from a lot of your bigger advertisers?
I think the sensitivity is there, right, in a sort of programmatic performance-based marketplace like ours. You saw it in 2022, 2023, where in a period of sort of distress, and now this was truly a once-in-a-generational kind of period of distress, but they were able to very quickly adjust their footprint, their spend with us. They did so less with other channels that were perhaps less performant but had sort of longer-term contractual obligations tied to them. So I think near-term or at any given moment in time, it is a channel that may have a bit more volatility. But if you zoom out, I think the unambiguous trend is one where dollars are shifting from those perhaps day-to-day more stable channels to our more performant channel.
And you talk to the carriers, they have one that sort of, I would say, that is the best carrier in the space. It's characterized their marketing spend as a pyramid, and they put our channel at the top of the pyramid in terms of its sort of value, so it's of the things that they would turn off from if they were purely doing it based on the value they're extracting, it's at the top. It's the last thing that would go. I mean, after they would turn off Google before they turn off EverQuote because we give them insurance is all about targeting. Every carrier has a very specific assessment of risk and value down to the individual level, right?
You're worth a different amount to Progressive than I am, and so in an ideal world, they have all of your underwriting characteristics before they even decide to sort of bid for your business, and they can assign an individual value to you. We effectively provide them a platform that allows them to do that, which they can't do in any other channel, any other platform. That ability to target really puts us at sort of the top of the pyramid. It's just about getting carriers to do that better and better, target better and better over time.
Can you explain just a little bit, expand on the source of that data and why that differentiates? Or, I think you just explained why, but how you're able to do that.
Yeah. So I mean, the fundamental model or one of the key sources of value add is we will do the work to source anyone who's on the internet with some intent to buy insurance through all the channels, right? We'll get them into one of our properties where we'll do the work to collect all the relevant underwriting information that a carrier would need to make an informed decision about, A, do we want this consumer or not? And B, what's this consumer worth to us? And we'll pass that to the provider for those who are capable of receiving it literally at the time of bid. So in real time, they have a full consumer profile before they decide, "Am I going to bid on this person? And how much am I going to bid for?" So the majority of it is first-party data.
We do incorporate some third-party data, and I think there's opportunities to continue to augment the third-party data over time, but our ability to collect that in source at scale, collect that information really efficiently, like optimizing the process whereby we collect this information over time and then expose it to carriers or agents at the time they actually place a bid for a consumer, is the core part of the value add to the marketplace.
Got it. Just talk about as you have kind of your ongoing relationships. What sorts of reporting do you guys provide your bigger customers as they're looking to close the loop on attribution measure campaigns, etc.?
Yeah. We'll provide. I mean, we have some standard reporting. Then we have a relatively high-touch model with our larger customers. So we have, in some cases, teams with dedicated analysts who are doing analysis at all different kinds of levels by geo, by consumer type, giving them insights into our auction, how are they performing relative to others, where are there opportunities to get more volume within their target levels. I would say the majority of it, for the larger carriers, is done kind of in that way. Most of them act on the recommendations we provide.
Yeah. Got it. Okay. You obviously have a very unique insight into Google and a lot of the changes with GenAI and that sort of thing. Talk about just what are some of the discoverability observations you've made as Google is starting to implement the chat box and all that stuff?
Yeah. It's been interesting. I think financial services and insurance specifically is a category that in the paid context, we have not seen it be affected. I think where they seem to have started with their GenAI more broadly is sort of replacing some of their organic search results with the sort of Gemini-like answer box, and we've certainly heard from a lot of players who are not just in our industry, but broadly who are very reliant on SEO, on organic traffic, that their traffic flow has been quite disrupted by that, but in insurance, and particularly paid category of insurance, it tends to be a very sort of transactional search, which doesn't, I don't think lends itself quite as well to the current version of GenAI that Google uses in its organic results.
And I also think there's probably an aspect of it, which we know this is a major money-making category for Google. So they're probably reluctant to disrupt it too much. But we really haven't seen any effect.
Interesting. Yeah. Have you guys participated? I mean, they are testing. We talk to advertisers, and they are absolutely trying to learn what value they can bring through the box, so to speak. Hard to know kind of which verticals or whatever. I'm just curious, in your network, whether you guys directly or others in your network, have you heard any sort of early signals on any of that testing in the GenAI box, so for performance ads?
For performance ads?
Yeah. Yeah.
Not yet. Not in our category.
Okay. Okay. Got it. Let's talk about the agent business, obviously. Been kind of more stable as the environment improves. Talk about how that piece of the business, what kind of trajectory it catches with some of these tailwinds you're speaking to.
Yeah. So the agent business has historically been a very important part of our business. We have the largest local agent network of sort of anyone in this business. We view it as a core distribution asset. A lot of consumers want to buy insurance from an agent. It's a complicated category. It's a complicated purchase. And we think agent distribution will remain an important part of the overall insurance distribution for many, many years to come. So our focus has been in improving the quality of the product offering for agents and beginning to expand that product offering for agents. As we look at sort of near term, I think next year, the outlook is good for the agent business. You've got carriers, the captive carriers, who are kind of lower on the recovery curve, finally catching up.
And what that has meant is they're reintroducing marketing support for the agents to buy our leads. That has happened over the course of this year. And all these captive carriers, State Farm, Farmers, Allstate, who support the local agents, are very much in growth mode going into next year. So I think you've got the carrier tailwinds starting to emerge. And then we have been working to continue to improve and expand our product offerings to agents. And I think next year will be somewhat of a defining year where we're able to get a few key products to market, where some of the products that we've rolled out get sort of mass adoption. So I think it's an area where we'll continue to extend our advantage.
Got it. Okay. I think you've got some regulatory changes coming to that part of the business starting, it sounds like, January 1st. How much does that affect the entire agent business, essentially, of just thinking in terms of strictly telephonic outreach, that sort of thing? Just talk about the magnitude within your business, if you can, of impact, potentially. Because you've obviously signaled this is coming, but.
Yeah. Yeah. So for those less familiar with it, there's a rule change imposed by the FCC regarding the TCPA, Telephone Consumer Protection Act, which oversees how consent is collected on websites for telephonic outreach to consumers. So what that means is today, when the consumer comes through our site, they provide consent with the click of a button that allows multiple parties to reach out to them. And in our case, it would be multiple local insurance agents can call them. In the future, beginning, it's actually January 27th, the rule will change such that the consumer needs to take one action per party that will reach out to them. So now, instead of clicking a button once and us being able to connect that consumer seller lead to two or three agents, they would need to click one per sort of seller.
The net effect of that, right, if you think about the consumer's experience as they're going through it, is some consumers will opt into sort of fewer lead sales than they otherwise would have if it was a sort of one-to-many opt-in. So we will have fewer leads available to be sold to agents. But on the flip side, the performance, the quality of those leads will be meaningfully higher. And we know this through a lot of testing we've been doing this year because, A, the consumer has opted in more explicitly to each option. And reason number two is there will be less competition on those leads, right? So before, there were two agents competing for that consumer's business. And now there's just one agent competing for that consumer's business. That agent will have a higher conversion rate. So lower volume, higher quality.
The way that we'll sort of manage through it is we will reflect the higher quality in our pricing. And we've already begun to have some of these pricing discussions not only with the carriers but with the agents themselves. By and large, it seems to be like it will be well accepted. So it's hard to know the exact net effect of it. But volume will come down. Pricing will go up. These two things will offset. We'll end up with a higher quality product for the agent. We'll end up with probably a better consumer experience, a consumer who has a little more control and receives fewer unexpected calls. And so we view it as a net positive for the industry, for EverQuote.
I think we'll end up on the other side with some having taken a step or two forward because not only are we responding to the sort of direct change, but at the same time, what this change has allowed us to do is get sort of accelerated carrier approval for other products that we want to distribute to agents because they're a little concerned about, "Hey, well, if our volume drops and we're trying to grow next year, how are we going to offset that?" And so through these conversations we've been having with carriers all year, we've been able to accelerate, I think, approvals and adoption of some of the next products that we want to bring to market for agents.
Got it. Got it. And maybe a financial question on that. I think you were pretty clear on the call. Look, there's going to be an impact to volume. Offset is price. I mean, I guess two questions for you, Joseph. One, I guess, how quickly does that or how much is in your control, right, to control the value there? And two, I don't know. It seemed like there's clearly a directional offset there. On the other hand, I could be reading into this incorrectly, that maybe initially, the volume loss might outweigh the value increase. Am I thinking about how do you want investors to sort of think about that?
So we think about Q1. This is going on January 27th. It's important to realize that carriers will start sort of cutting over to this before then, maybe even in the second part of December. So carriers to preparation. So first part, when you think about what's the impact, we're trying to assess what's going to happen with individual agent behavior. So when we think about that, what have we done to try to assess? We've talked with a lot of agents, particularly larger agents. It's also important to note our agent network is 90%+ captive agents. So you also can talk with the captive carriers, the largest, obviously, being State Farm, right, and who want to get back into growth mode next year.
As Jayme said, there's this increasing support from them to say other products and services they want to get going on because they want to have those for 2025. We think exactly how this will work out to streamline folks. This is the leads portion of the business, about 25%-30% of the business. As we go into the start of the year, we expect that the impact will be we'll have some impact on revenues because agents won't agree to pricing right away. Some will, some won't. But individual agents will take time, we suspect. And this is being done on the click side. We'll say carriers. You'd expect changes to go through much more quickly just given the data-driven decision-making approach. With agents, it's more complicated when you overlay a small business owner, right?
So the way we think about it is it'll work through Q1. The impact from a revenue viewpoint is that we typically have a step up from Q4 to Q1, sequential revenue growth. It's double-digit. It'll be more muted this year, reflecting that. And we may not get the price increases initially to roll through all the agent base. And then on the VMM margin side, I think there'll be some wonkiness as this works through in Q1. We think we'll normalize as we get into the second part of Q2 into mid-year, back to that 30% range.
Got it. Okay. And then just, I guess, a couple of follow-ups on that front. One is you've kind of talked about first half of the year. I would assume this kind of flows through for the full year. Is that right? Or is there just a more muted impact?
I think it's normalized, we believe, by the middle of the year. The reason we think that is that just go through the backdrop, right? We're putting in price increases. We're not sure exactly how agents will respond to them in terms of what time period. We've got some good insight, though, from especially some of the larger agent focus groups we've done. They want to grow next year. That's a favorable backdrop. Then you look at the carrier side. Again, I'll use the largest being State Farm. State Farm wants to get back into growth mode more next year. It's been fairly publicly said.
So as you think about an environment where you have to put price increases in and you have not only agents but the captive carriers' support of growth, we think this will all work through in the first part of the year. We'll get a sort of a new normal level, which is somewhat lower volume of consumers coming through. The volume that does come through is higher quality, will be higher monetizing. Does it exactly come out even? We'll see. We'll probably have some puts or takes on either side. We do think it's going to be a better experience for the agents. Important to note as well. The agents, they'll get higher quality consumers. I think they'll start to appreciate that as they go through the course of the first part of the year.
Yeah. Yeah. I mean, I guess the question becomes - and maybe this is impossible to answer to some degree - but clearly, there's a shots-on-goal way to spin this versus, "Hey, there's a finite amount of demand," right? And so there's no change to the end value, right, delivered to the customer. I don't know. How should we?
There's a theoretical state that that's correct, I would say. That's what we sort of talk about. It sort of normalizes somewhere in the middle of the year. I think it's a reasonable way to think about it. The other thing that you may see on the agent side is we talked about new products being coming in for agents, right? It's marketing services, calls, other things we've been talking about. You may see them embrace some of those things as other ways to grow as well. And so that'll also factor into the mix as you progress through the year.
Yeah. Yeah. Talk about that, if you could, either of you, just on what those other products are and how sort of financially they could contribute?
Yeah, so some of the products we've got, the lead is sort of the core product today. Over the last few years, we've started wrapping some services around those leads to improve the value of them, one of which we call Lead Connection Service. If you think about most insurance agencies, they'll get a lead. This is not like a call center environment, right? It's a mom-and-pop kind of agency, and the lead depreciates in value over time because the consumer's in market when they submit that form. So if you call them right away, your connection rate, your conversion rate is going to be higher than if you wait an hour to call them. But the agents aren't quite equipped to move that way, so we'll provide basically an outreach service where we'll make the call on behalf of the agent. We'll do it immediately.
We'll do it on a certain cadence that sort of adheres to the best we'll get them the best performance, and then we'll live transfer the consumer into the agency, so it takes away the part of the sort of working the lead, that part of the process that they're not particularly good at and most agencies don't like to do, and over the last year and now into next year, we will have very, very broad adoption of that product as sort of a value add around the lead itself, so we'll continue to work on improving the quality of the lead and wrapping services that make the value of that lead higher. There's a number of other things on the roadmap that we'll do that.
Then you get onto, "Well, what else are these agencies spending money on to grow?" And typically, there's a couple of other categories of spend. One is they may buy just live calls. These are consumer-initiated calls. You go to Google, there will be a click listing, but there will also be a call listing that you can press a button and just call someone. So calls is another category, live calls that we're invested in. And then we would characterize as marketing services. So most agencies will do some local advertising of their own under their own brand. And they could do that on Google. They could do it on Facebook. They could do it in any number of digital or non-digital channels. They're not particularly good at this. And so what they'll tend to do is work with a local vendor or some specialist vendor.
We believe that we can. It's like this is a thing we are very good at. It's a thing we can actually do in an automated way on behalf of local agents. We can productize it and extend the offering to leads, calls, marketing services so that we become the sort of one-stop growth shop for these local agents, and doing so would increase the size of our addressable market with these agents by multiples.
Yeah. Got it. That's great. Let's go back to the variable marketing comment. I guess two questions. One, just talk about some of the pull-forward dynamics you had mentioned, I think, on the conference call in kind of the middle part of the year. And then secondarily, just a lot's happening, right, in search and in intent-based discoverability on the internet. Does that do anything for you? Does it carry any effect one way or the other structurally for your VMM in the future?
When you think about VMM, I guess I'd say is just to give context beyond. Variable marketing margin percentage, historically operating, we go back to marketplace only, not only at other businesses, like 29%-30% was going into 2023. You had levels in the mid- to high 30s in late 2023 when you had this very depressed advertising environment. We started the year out 33.5%-33.8% in Q1. We sort of had it coming down. We think it'll sort of normalize around this 30%, give or take. We're not rigid in terms of saying it has to be 30% every quarter. But we do believe that as you think about the traffic curves, that's sort of the level we still naturally will fall, and we see lots of ways to continue to support that.
Notably, with the investment in bidding and bidding technology, we talked about on our call a few weeks ago. One is we did so well in Q3 relative to some others and relative to some of our earlier expectations is just our bidding technology and the speed with which we can analyze the data and improve performance. And we think that continues to bear fruit for us. I think that's a key driver for us that will sustain us well into 2025 and beyond.
Yeah. Got it. And then just from a, if you can unpack the variable versus the fixed leverage expectations you have kind of philosophically over the next few years, how to think about that?
Sure. So maybe we'll think about it in a little bit more of an EBITDA type of context. So just context, we're 5.5%-6% pre-downturn in 2021. We've made lots of changes last year to realign the business and focus on how we can help customers succeed, the markets we really feel like we have a competitive advantage in P&C, and most importantly, how do we drive value for shareholders and cash flow? So you look at that EBITDA margin at the start of this year, 8.5%. We had 11% in Q2. What we said in the summer is expect those types of margins to continue through the rest of this year. We actually were slightly higher in Q3 because we had overperformance flow to the bottom line with operating leverage. We're sort of back to 11% in Q4 on our guide.
We think as we look to next year, we sort of see it around those levels. We haven't guided fully for the year yet. I'd say you may have a little bit of pressure in Q1 as we have the normal step-up in costs with wages, inflationary pressures. You may probably exit 2025 with a higher rate. We think we are going to continue to be making investments, but we're going to do it in a very disciplined way, particularly in the first part of the year as we work through FCC and get clarity on that. I think that's been the key part of how we've been building the operating leverage in business, this philosophy of how are we really driving value, where are we driving ROI, and just keeping that discipline.
Got it and then, I guess, one final question. We're just out of time. Generating some nice cash now, growing the cash balance on the balance sheet, no debt to speak of. I don't think.
No debt. No debt.
Keep me honest there.
Joseph asked you.
What to do?
What to do? So first of all, very nice change from where we were a year ago, right? So we had $83 million at the end of Q3. Given our model of EBITDA and the guide, converted to cash flow and the guide for Q4, we over $100 million at the end of the year. As we look to next year, I would say a couple of things. One is feel good about the cash position. We'll continue to build the cash position in our model. We don't need cash to really grow the business. Working capital needs are pretty straightforward and pretty nominal within a period. And so I'd say two things. One is we've talked about we may selectively think about M&A.
When we think about M&A, it's really going to be in this very disciplined approach of, as a former M&A banker, I'd say one standard deviation away. We have our strategy. It's within P&C. It's being built within P&C. It's also models that drive cash flow, so that'll be the context in which we think about it, and we think there's an environment where there's many companies that we may have interesting products or approaches, but they aren't able to scale. They aren't able to raise the capital to do it. We could be the place they want to be. They want to be part of a winning team, and I think you're seeing that emerge for us. That's one, and the other thing is we'll think about what else we should be doing with the cash to drive value for shareholders towards buybacks or otherwise.
Yeah. Yeah. Got it. Unfortunately, we're out of time. Thank you for the time, gentlemen. Thank you. Appreciate you being here.
Thank you.